Saturday, January 28, 2006
ChoicePoint reached a settlement with the FTC in which it will pay 15 million dollars, although according to the St Pete Times (AP) here, the SEC may still be investigating activity related to the sale of company shares by individuals associated with the company "after the company learned of the data breach but before it was made public."
The company issued a statement that notes it has now implemented changes including the "creation of an independent chief credentialing, compliance and privacy officer." (here) To correct myths circulating concerning the data breach, the company also has a Q and A explaining matters. (see here)
The Stipulated Final Judgment here provides that the agreement for "Civil Penalties, Permanent Injunction and Other Equitable Relief" "resolve[s] all matters in dispute in this action without trial or adjudication of any issue or fact herein and without Defendant admitting the truth of, or liability for, any of the matters alleged in the Complaint."
Friday, January 27, 2006
Martin Armstrong was charged with a multimillion dollar securities fraud through his firm, Princeton Economics International Ltd., back in 1999. U.S. District Court Judge Richard Owen ordered Armstrong to turn over certain assets and evidence that a receiver for the firm alleged he was hiding, and when Armstrong said he did not have the items, the judge sent him to jail for civil contempt. That was in January 2000, and there Armstrong remains -- in the Metropolitan Correctional Center in New York City -- until he turns over the items and, in the metaphorical language of civil contempt, unlocks the keys to his jail cell. Armstrong has protested that he cannot comply because he does not have the items, but Judge Owen has concluded that Armstrong is not telling the truth, and refuses to budge on the civil contempt. Three times Armstrong has appealed to the Second Circuit to release him, and three times the court of appeals has refused to overturn the district judge's order or grant habeas corpus. On Jan. 24, Armstrong's attorney, Thomas Sjoblom, argued that the long-running civil contempt was beyond the district court's inherent authority, marking Armstrong's fourth trip to the court of appeals. Sjoblom represented Richard Scrushy in successfully resisting the SEC's attempt to freeze his assets before his indictment in the HealthSouth case, but he ran into some tough questioning from the panel, according to an article in the New York Law Journal (available on Law.Com here). If there is one thing judges are hesitant to accept, it is an argument about seeking to limit the judiciary's inherent authority to punish a contempt. Nevertheless, six years is a long time to languish in jail, especially when Armstrong still faces the securities fraud charges that triggered the whole fight in the first place. If at first you don't succeed, try at least three more times. (ph)
Former Georgetown University Medical Center employee Adriana Santamaria and her sister, Maria Cabrales, were sentenced to 20 and 15 months, respectively, for defrauding the Center and federal health programs of over $580,000. Santamaria was responsible for the financial affairs of the Department of Microbiology and Immunology, including the disbursements for research grants administered through the department. Among other ways in which Santamaria siphoned money from the med center was by paying her sister Maria and her husband honoraria for scientific lectures that never took place, as described in the U.S. Attorney's Office's press release (here):
According to the government's evidence, between May 1998 and October 2001, the two defendants, Adriana Santamaria and Maria Cabrales, conspired to obtain money from the Department by fraud through a variety of schemes. In one such scheme, Santamaria submitted authorization for the payment of honoraria in the names of Cabrales and her husband for scientific lectures they never gave nor had any capacity to give. Santamaria had no authority to engage lecturers on behalf of the Principals, let alone the services of her relatives, who were in no way qualified to speak on any subjects related to the fields of microbiology and immunology. Upon payment, Santamaria and Cabrales would deposit the Department checks in accounts in the names of Cabrales and her husband. In turn, Cabrales would pay Santamaria by check a share of the proceeds. In sum, Santamaria submitted 37 fraudulent expense authorization forms to the Georgetown Accounts Payable Department, resulting in a total of $290,000 in honoraria paid in the names of Cabrales and her husband for lectures never, in fact, given. In return, during the same period of time, Santamaria received $69,052.31 from the Allfirst joint accounts of Cabrales and her husband.
One would think that 37 payments for non-existent lectures would have been noticed by someone, but then who pays attention to those things anyway, it's the coffee and doughnuts that are the main attraction. (ph -- thanks to Delia Johnson for passing this along).
The Glenn Frey song "Smugglers' Blues" talked about "the lure of easy money," and that certainly seems to be the case with those seeking to profit from the federal outlays in the wake of Hurricane Katrina. In Oregon, the U.S. Attorney's Office announced (here) the indictment of six individuals for receipt of stolen government property for falsely filing with FEMA for $2,000 Katrina disaster assistance grants or $2,358 rental assistance grants:
Federal investigators have determined that checks were issued by FEMA payable to Portland residents named in these indictments based on false representations that the defendants were displaced by Hurricane Katrina. The indictments in these cases each allege that the defendant received a FEMA disaster assistance check knowing it was stolen. Each defendant is charged with one count of Receipt of Stolen Government Property.
In Conroe, Texas, Edward Good was arrested on state charges, and turned out to have seven unemployment relief debit cards, none in his name. According to a press release (here) from the U.S. Attorney's Office for the Southern District of Texas, this is the first such scheme involving Disaster Unemployment Assistance (DUA):
DUA provides financial assistance to individuals whose employment or self-employment was lost or interrupted as a direct result of a major disaster declared by the President of the United States. On August 29, 2005, President Bush declared a major disaster for Louisiana as a result of Hurricane Katrina. The Louisiana Department of Labor administers the DUA program for the State of Louisiana. Funding for the DUA program comes directly from federal funds provided by the Federal Emergency Management Agency (FEMA). DUA benefits are available to individuals beginning after the date the major disaster began and for up to 26 weeks after the disaster declaration, as long as their unemployment continues to be a result of the major disaster. The maximum benefit amount is $98 per week for 26 weeks for a total possible benefit of $2,548.
The complaint alleges that Good lived in Marrero, Louisiana, until Hurricane Katrina struck and prompted his evacuation to the Conroe, Texas, area. Good first filed for DUA with the State of Louisiana in his own name and received a debit card within a few days. Thereafter, it is alleged that Good began a scheme that involved paying Conroe-area residents in cash or in drugs to obtain their identification information, which he then used to file for DUA benefits in their names listing a false prior place of employment in Louisiana. The Conroe-area residents were not Hurricane Katrina evacuees. Good would have the debit cards mailed to him and then personally use the cards bearing the names of these non-evacuees.
All that easy Katrina money has a mighty strong attraction. (ph)
Well-known plaintiffs class action law firm Milberg Weiss is the lead counsel in a settlement with KPMG regarding the tax shelters sold to individuals that the accounting firm has admitted were bogus. The settlement calls for KPMG to pay $225 million to the taxpayers who bought the shelters, from which the attorneys will receive $30 million. A Wall Street Journal article (here) discusses an offer by Milberg Weiss to attorneys for tax shelter purchasers who have opted out of the class that they can receive a portion of the attorney's fees, conditioned, of course, on their clients joining the settlement. When the settlement, which has not yet been approved by the federal district court, was first disclosed in 2005, lawyers for some of the tax shelter purchasers asserted that it was collusive and undervalued the potential claims against KPMG. Milberg Weiss has pushed forward, but a significant number of class members -- over 20% -- have opted out, which means that the settlement may not cover enough potential claims to make it worthwhile to KPMG, which would still have to litigate with a number of the remaining plaintiffs.
An interesting question is whether it is ethical the offer the attorneys for those who have opted out of the settlement a portion of the fee pool. It is always good to see that Milberg Weiss has retained the services of a law professor well-versed in the field of legal ethics to advise on the fee-sharing issue, and Professor Roy Simon from Hofstra is quoted in the Journal article as supporting the fee offer. The question for those attorneys who advise clients to opt into the settlement and accept a portion of the fees will be whether they had a conflict of interest by putting their interests in obtaining fees ahead of the client's goal of securing the largest award possible. I suspect the issue of timing will be key. For example, if an attorney recommends joining the Milberg Weiss-negotiated settlement after being offered a portion of the fee pool, and if later cases turn out to involve substantially higher awards to individual plaintiffs who purchased tax shelters, then those clients may argue that the conflict tainted the lawyer's advice and constituted a breach of the lawyer's fiduciary duty. All the disclosure in the world may not cure a situation in which the lawyer looks to be putting his or her own fee before the client's best interest, and it is not a claim in which you want to be on the receiving end. Even assuming Milberg Weiss' offer passes muster under Rule 1.5 for sharing fees among lawyers, and the lawyers disclose to their clients the amount they expect to receive, it may be a situation fraught with too much danger from the potentially serious conflict of interest the offer poses. As always, the admonition voiced at the end of roll call on Hill Street Blues certainly applies here: "Let's be careful out there." (ph)
Thursday, January 26, 2006
Being a general counsel for a corporation is getting to be almost as precarious as being a chief financial officer (see post below). Bruce Hill, who was the general counsel for Inso Corp., was convicted in June 2005 of one count of perjury for lying to the SEC in its investigation of accounting fraud at the company. The jury deadlocked on securities fraud and conspiracy counts of the indictment, and after sentencing the government dismissed those charges. Hill received a sentence of a year-and-a-day for the perjury conviction. The effect of giving him the extra day actually reduces his sentence because he is then eligible for good time credits that can reduce his sentence by 15%, so he will only have to serve a bit over ten months. According to a press release from the U.S. Attorney's Office for the District of Massachusetts (here):
Evidence presented during the month-long trial proved that at the end of September 1998, Inso Corporation, Inc. arranged a sham transaction whereby a Malaysian software distributor signed a purchase order for roughly $3 million upon assurances that Inso would actually sell the software to another customer within a few days or weeks.
At the end of 1998, HILL, who was the Vice President, Secretary, and General Counsel of Inso, played a pivotal role in arranging a series of deals that were designed to create the appearance that the Malaysian software distributor had paid Inso $3 million for software products that Inso had reported as sold during the third quarter of 1998. In sworn testimony before the SEC, HILL disavowed any knowledge about the preparation of a fraudulent certificate which purported to reflect approval by Inso's Board of Directors of the issuance of approximately $4 million in letters of credit that were used to create the appearance that Inso received $3 million in payment for the reported third quarter sale. At trial, the United States presented evidence that HILL had personally directed the preparation of the fraudulent certificate and approved its signing.
Share prices for Inso's stock tumbled in February 1999, when the company publicly announced that it would need to restate its revenues from the first three quarters of 1998. The company is no longer publicly traded.
Interestingly, that factual recitation relates to the counts on which the jury did not convict Hill, but the press release adds that "United States District Judge Douglas P. Woodlock  noted his finding that – based on a preponderance of the evidence – HILL did conspire to commit fraud in connection with the reporting of revenues . . . ." After Booker, there has been some doubt regarding the applicability of the preponderance of the evidence standard for sentencing factors beyond the offense of conviction. The sentence may well have been influenced by the judge's finding of Hill's participation in the fraud, despite the inability of the jury to find him guilty of securities fraud and other counts beyond a reasonable doubt. At the same time, a conviction for perjury by a lawyer in a government investigation, particularly by the general counsel of the corporation, is a situation that would often trigger a higher sentence. The sentence will likely be yet another issue on appeal in the case. (ph)
Daniel Adkins was the general counsel for Xpress Pharmacy Direct, an internet prescription drug supplier that was shut down in May 2005 by federal authorities for illegally filling over 72,000 prescriptions for pain killers and other controlled substances. The company's founder, Chris Smith, was indicted in August 2005 and remains in custody. Adkins is charged with helping Smith to hide assets after learning about the government investigation, and for contacting drug suppliers and assuring them that Xpress Pharmacy Direct was a legitimate business authorized to dispense the medications. An AP story (here) quotes Adkins' attorney as stating that the government's allegations "are simply not true." (ph)
Two doctors in Florida, Chad Livdahl and Zahra Karim, received substantial prison terms for distributing a botulism toxin as a substitute for botox to more than two hundred doctors. Livdahl and Karim each entered guilty pleas in November 2005, and were sentenced to nine and six years, respectively, although Karim will serve a shorter term because she will be transferred to Canada, where she is from. Livdahl and Karim marketed the botulism through their company, Toxin Research International (catchy name), and earned over $1.7 million. In addition, former University of Kentucky ophthalmologist Robert Baker was sentenced to 180 days of home confinement for writing a testimonial about the botulism that was used in marketing brochures. Somehow, using botulism to get rid of crows feet and wrinkles seems a bit counter-intuitive, but then I'm not a doctor. A CNN.Com story (here) discusses the sentencings. (ph)
Enron conspiracy defendants Ken Lay and Jeffrey Skilling have petitioned the Fifth Circuit for an order delaying their trial so that the appellate court can consider their appeal of District Judge Sim Lake's denial of their motion for a change of venue. On Monday, Judge Lake denied again the defense request to move the trial from Houston to another district due to the widespread negative publicity about Enron and their alleged role in the collapse of the company. I think the likelihood of the Fifth Circuit ordering a change of venue, or delaying the proceeding to consider the request, is somewhere between slim and none. Federal Rule of Criminal Procedure 21(a) (here) authorizes the district court to order a change of venue due to prejudice under the following standard: "Upon the defendant's motion, the court must transfer the proceeding against that defendant to another district if the court is satisfied that so great a prejudice against the defendant exists in the transferring district that the defendant cannot obtain a fair and impartial trial there."
It is not just any prejudice, but prejudice "so great" that a "fair and impartial trial" cannot take place, a very high threshold for the defense to meet. Judge Lake has sent out an extensive questionnaire to the jury pool to ferret out potential prejudice, and the actual voir dire has not taken place to determine whether jurors have been tainted by the pretrial publicity and the effects of Enron's collapse on the local economy. The defense argument is largely supposition at this point, and the Fifth Circuit is unlikely to intervene before any voir dire and determination of actual prejudice. Moreover, because the defendants have a decent chance at an acquittal, given the nature of the case, the court of appeals will probably take into account the fact that a not guilty verdict would obviate any need to deal with the issue further. The Fifth Circuit can take a pass on this issue until forced to confront it after a guilty verdict, if there even is one. A Houston Chronicle story (here) discusses the defense motion to postpone the trial. (ph)
Wednesday, January 25, 2006
While prosecutors in New York are dealing with the first skirmishes in the 19-defendant KPMG tax shelter prosecution, they are also looking at the enablers of the shelter sales by investigating three tax lawyers from Jenkens & Gilchrist. The lawyers, Paul Daugerdas, Erwin Mayer, and Donna Guerin, provided opinion letters used to support the tax shelters sold by KMPG to a number of wealthy individuals. A New York Times article (here) states that a grand jury in the Southern District of New York is investigating the opinion letters provided by the firm that most likely will focus on whether they were simply cookie-cutter documents that were not adequately supported while designed to mislead the IRS on the appropriateness of the tax treatment of income and capital gains. The Times article notes that Daugerdas earned $93 million in fees in from 1999 to 2003 from the issuance of the letters, while Mayer earned $28 million and Guerin $4 million over the same period. Jenkens & Gilchrist received $267 million in fees from the tax shelter business, although not all of that was generated by the issuance of the opinion letters. The firm has already agreed to an $81 million settlement with individuals who purchased tax shelters from KPMG supported by the firm's opinion letters (see earlier post here). In addition, Daugerdas and Meyer are no longer with the firm and Guerin is no long an equity partner. It will be interesting to see if any of the lawyers will agree to cooperate with the government and agree to testify in the pending KPMG tax shelter prosecution. (ph)
Peter Lattman has an interesting post on the Wall Street Journal Law Blog (here) about high-level prosecutors whose careers involved working under Michael Chertoff, the head of the Department of Homeland Security. At various points in his career, Chertoff has been the U.S. Attorney in New Jersey, head of the Criminal Division at the Department of Justice, and a judge on the Third Circuit. Among those who have intersected with Chertoff are the current head of the Criminal Division, and the U.S. Attorneys for the Southern District of New York and Northern District of Georgia. In football, there is discussion of the various coaching "lines" emanating from famous head coaches, such as Bill Walsh of the San Francisco 49ers and Bill Parcells from the Giants, Patriots, Jets, and Cowboys. Should we start talking about the Chertoff line, the Ken Starr Line, or the Janet Reno line? (ph)
The NASD has put forward new "interpretive material" (here) (called IM, but not to be confused with what my teenage daughter does ad nauseam) to its Rule 3060, entitled "Influencing or Rewarding Employees of Others." The new approach comes in response to revelations that brokerage firms have been lavishing benefits on traders at mutual funds, including Fidelity, in the form of "business entertainment" to win their firms' business and avoid the rules restricting gifts. In one particularly wholesome example, brokers paid for the bachelor party of a Fidelity trader in Miami that included hiring a dwarf for tossing purposes (see earlier post here) that is the subject of an SEC and U.S. Attorney's Office investigation. The IM first gives a definition of "business entertainment" to distinguish it from the more restrictive rules on gifts, which cannot exceed $100 in value:
[A]ny social event, hospitality event, charitable event, sporting event, entertainment event, meal, leisure activity or event of like nature or purpose, as well as any transportation and/or lodging accompanying or related to such activity or event, including such business entertainment offered in connection with an educational event or business conference, in which a person associated with a member accompanies and participates with such employee irrespective of whether any business is conducted during, or is considered attendant to, such event." This definition codifies NASD’s longstanding position that a member must accompany or participate in an event for it to be deemed business entertainment. Thus, for example, if a member gives tickets to a sporting event but does not accompany the recipient to the event, the tickets are deemed to be a gift rather than business entertainment. In addition, the definition of "business entertainment" expressly includes transportation and lodging expenses provided by a member.
The idea of defining "business entertainment" is to tighten up on what is permissible and not just a gift in disguise. From there, though, the NASD then puts the burden on the brokers to come up with their own policies about what is and is not acceptable. The IM adopts a general approach that business entertainment should not go, in effect, too far, but does little to create any kind of bright line. According to the proposed IM:
The overriding principle of the proposed IM is that a member or its associated persons should not do or give anything of value to an employee of a customer that is intended or designed to cause, or otherwise would be reasonably judged to have the likely effect of causing, such employee to act in a manner that is inconsistent with the best interests of the customer. The proposed IM provides guidance concerning the written policies and procedures that members must adopt surrounding their business entertainment practices. First, the member must determine and define the forms of business entertainment that are appropriate and inappropriate, including appropriate venues, nature, frequency, types and class of accommodation and transportation, and either firm dollar limits or thresholds requiring advance written approval. Notably, the proposed IM does not impose hard limits, nor does it require that all members adopt the same limits or even treat all recipients equally. At the same time, however, a member’s policies and procedures must not be so unbounded or vague that no reasonable determination of propriety can be discerned. In addition, the proposed IM expressly would allow members to set different standards for business entertainment in connection with events that are educational, charitable or philanthropic in nature.
Different standards means that each firm will be accountable -- or not -- for what it is willing to permit in this area. Will some firms write standards that leave enough wiggle room to avoid ever being in violation of the rule except in the most egregious cases? Policing the brokers may not be the best approach if mutual funds can hide the true costs of their trading through minimal, and untimely, disclosure. The better approach may be to enhance the disclosure of trading costs, and the firms that are used to execute transactions (including the amount paid to each), so that all can see how much is being paid. Would the industry accept that level of transparency? Perhaps not, but adopting a "standard" that allows firms to set different standards may not do much to curb excessive business entertainment. (ph)
Professor Pamela Bucy, one of the leading academics in the white collar crime field, has been awarded the Burnum Distinguished Faculty Award by the Univeristy of Alabama, where she has been on the faculty of the School of Law since 1987. The Award is the highest honor for a scholar at the University, and recognizes her many contirbutions to legal scholarship. Pam is an author or co-author on treatises on health care fraud and federal criminal law, in addition to her casebook on white collar crime and a number of law review articles. Congratulations!
Richard Hatch, the first winner on the Survivor series, will now have to navigate a federal prison after a jury in Rhode Island convicted him on all 13 counts of tax evasion. Hatch was charged with failing to report the $1 million prize he received from Survivor along with over $300,000 from co-hosting a show on a Boston radio station and payments he diverted from a charity he controlled. After originally agreeing to plead guilty to two counts, Hatch backed out of the deal and went to trial on the charges. Although defense counsel offered a variation of the "I'm an idiot" defense by asserting that Hatch is the "world's worst bookkeeper," there was no further mention before the jury of the attorney's claim that Hatch made a deal with Survivor's producers for them to pay the taxes on his prize if he did not report that other contestants cheated by secretly eating. The jury deliberated less than a day before returning its verdict, and in a step not usually seen in white collar cases, the judge ordered that Hatch be taken into custody immediately because he is a flight risk. An AP story (here) discusses the jury verdict. (ph)
Tuesday, January 24, 2006
LATimes (AP) reports here that U.S. District Judge John Walter rejected a plea agreement involving former Gemstar-TV Guide International Inc. Chief Executive Henry Yuen. The deal would have allowed Yuen to receive a minimal sentence in comparison to many of the recent white collar sentences issued throughout the United States, ("6 months of home detention, a $250,000 fine and a $1-million charitable donation").
It is rare that a judge rejects a plea agreement, but it is also rare that a company weighs in by asking the judge not to go ahead with this lenient sentence. The government now has the choice of either entering into new negotiations that result in a plea with a stiffer sentence, go to trial, or dismiss the case entirely.
CNN (AP) reports here that Ken Lay and Jeffrey Skilling, former Enron executives who face criminal charges in federal court, will be facing a hometown jury as their motion for a change of venue was denied. The case will proceed in Houston next week. (See also Mary Flood's story in the Houston Chronicle here; and Tom Kirkendall's Blog Houston Clear Thinkers here).
The AJC reports here of the opening witness at the Bill Campbell trial. The former Atlanta mayor was probably expecting this to be one the worst days of his trial as most advocates adhere to the law of primacy and recency and thus present their best evidence first and last. Surprisingly, it sounds like this wasn't the case for Bill Campbell, as the AJC reports that the opening witness "seemed to actually help the defense more than prosecutors." One has to wonder if the prosecution has an unusual strategy or if this really was their best evidence.
Debra Wong Yang, USA of the Central District of California issued a press release here regarding a plea of "[a] former chairman and chief executive officer of Credit Lyonnais." The plea was to "two felony charges of causing Credit Lyonnais to make false statements to the Federal Reserve Bank."
Positions as White Collar Federal Prosecutors
The Tax Division of the U.S. Department of Justice is hiring experienced attorneys to serve as federal prosecutors. Trial attorneys in the Criminal Enforcement Sections handle or supervise criminal tax prosecutions in the federal district courts throughout the United States. Cases involve violations of criminal tax laws by taxpayers having legal sources of income, as well as cases involving financial fraud, health care fraud, organized crime activities, and narcotics trafficking.
Applicants should have at least three years of post J.D. litigation experience which includes criminal or civil fraud trial experience, as well as exceptional academic credentials, and superior research, writing and oral communication skills. Applicants must be willing to travel.
Interested applicants should submit a cover letter, resume, law school and any advanced degree transcripts, a writing sample and a list of three professional references to:
U.S. Department of Justice
Tax Division – Criminal Enforcement Sections
Human Resources Office
P.O. Box 813
Washington, D.C. 20044
ATTN: Attorney Recruitment Coordinator
For more information about the Criminal Enforcement Sections, visit the Department of Justice’s Web site at: http://www.usdoj.gov/tax. For more information on attorney vacancies, please see http://www.usdoj.gov/oarm
(esp & ph)